Definition and Significance of CLV
The Customer Lifetime Value (CLV) or Lifetime Value (LTV) is the estimated total profit that a business is expected to realize from sales to a particular customer type over the length of the relationship between the business and the customer. In financial terms, it is the Net Present Value (NPV) of the cash flows from that customer over the time of the relationship. The CLV builds on customer history, but it is a forward looking metric. In the context of both digital and traditional marketing, knowing the value of each customer is key in evaluating and comparing the impact and cost-effectiveness of various marketing tactics. Most importantly, knowing the CLV of each customer segment will help a business determine which group to target and where to prioritize those advertising dollars. Siddharth Shah of Search Engine Land recently published a nice blog post about the particular usefulness of CLV to optimizing paid search (PPC) marketing campaigns.
How is the CLV calculated?
The CLV is primarily calculated based on the customer’s expected retention cost, annual churn rate, average per customer spend, the time period of the relationship (“time horizon”), the internal cost of capital, and the average Cost of Customer Acquisition (COCA). The lifetime value is typically calculated over a 1-7 year time horizon. Anything beyond that is not considered to be reliable. If you want more details, you may access an informative article about how the CLV is calculated right here.
Download the CLV calculator
Since we have found that our clients often don’t have the CLV for their customers handy, we had our math and finance specialist develop a CLV calculator for us to use in-house. It uses a widely accepted formula for calculating CLV. We thought we’d share it with you. Hope you find it useful!
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